Bunching deductions

Also called deduction bunching

A tax strategy that concentrates deductible expenses into alternating years so itemizing beats the standard deduction in those years.

What it means

Taxpayers choose each year between the standard deduction and itemizing, whichever is larger. When itemizable expenses hover just below the standard deduction, itemizing brings no benefit. Bunching means shifting expenses one can time, most often charitable gifts, so that two or more years’ worth fall into one year.

In the bunched year the taxpayer itemizes; in the off years they take the standard deduction. Over a multi-year period, total deductions can be higher than taking the standard deduction every year. Donor-advised funds are a common tool because they allow a large deduction in one year while grants to charities continue steadily.

Example

Suppose, for illustration, a household’s standard deduction is $30,000 and it has $25,000 of itemizable expenses a year, including $10,000 to charity. Normally it takes $30,000 each year, or $60,000 over two years. If it gives two years of donations in year one, it itemizes $35,000 that year and takes the $30,000 standard deduction the next, for $65,000 in total.

How it’s used

Households close to the standard deduction
Regular charitable donors
Timing elective expenses such as some property tax or medical payments

Strengths and weaknesses

Strengths

Increases total deductions over several years
Works with donations people already plan to make
Pairs well with donor-advised funds

Weaknesses

Requires planning and spare cash for larger gifts in one year
Charities may receive gifts unevenly without a donor-advised fund
Benefit depends on tax law and the household’s numbers

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.